Wednesday, April 23, 2014

FYI: Cal App Ct Rules Against Assignee of Sold-Out Second

Friday, April 13, 2012

The California Court of Appeal, Second District, recently held that: (1) the holder of a "sold out second" loan could not obtain a judgment against a borrower, where the holder of the sold-out second received the assignment ofthe loan from the senior lien holder which had previously foreclosed via a non-judicial foreclosure sale; and (2) an award of attorney fees was proper, despite the plaintiff's voluntary dismissal of its action on the note following ruling on the borrower's demurrer/motion to dismiss.

Defendant mortgagor ("Borrower") obtained a home mortgage loan from a mortgage lender ("First Lienholder") and secured the loan with two notes for different amounts and two separate deeds of trust on a single piece of property. The Borrower defaulted on the loan and the First Lienholder sold the property pursuant to the first deed of trust at a non-judicial foreclosure sale. Over a year after the foreclosure sale, the First Lienholder assigned the second trust deed to the plaintiff bank ("Second Lienholder"), which filed suit seeking a judgment against the Borrower for the amount allegedly still owing under the second note. The Borrower demurred, arguing that California's anti-deficiency statute precluded recovery of the debt secured by the second trust deed.

Concluding that the Second Lienholder's claims were barred by California's anti-deficiency statute, the trial court sustained the demurrer without leave to amend. The Borrower then moved for prevailing party attorney fees. The Second Lienholder filed a request for voluntary dismissal with prejudice two days after the court sustained the demurrer, but before the entry of judgment, and opposed the motion for attorney fees, arguing that there could be no prevailing party because it had voluntarily dismissed the action. The court vacated the voluntary dismissal, explaining that because it had sustained the demurrer without leave to amend, the Second Lienholder lacked the right to voluntarily dismiss. The court dismissed the action and awarded the Borrower attorney fees and costs.

The Second Lienholder appealed the judgment of dismissal and the award of attorney fees. The Court of Appeal affirmed.

As you may recall, California law prohibits a deficiency judgment on a loan secured by a deed of trust on real property, where the mortgagee has sold the property pursuant to a non-judicial foreclosure. Cal. Civ. Proc. § 580d. In addition, the California Civil Code provides that a plaintiff may voluntarily dismiss an action at any time before the "actual commencement of trial" and that voluntary dismissal deprives the court of jurisdiction except for purposes of awarding costs and attorney fees. See Cal Civ. Proc. § 581, subdivisions (b)(1), (c).

In reviewing California case law, the Appellate Court noted a perceived risk of abuse where a lender holds both senior and junior deeds of trust, and found dispositive the reasoning in Simon v. Superior Court, 4 Cal.App.4th 63 (1992), which held that a lender holding both the first and second deeds of trust on the same property could not recover on the loan secured by the second trust deed after the non-judicial foreclosure. The Court thus noted that under the reasoning in Simon, the First Lienholder in this case would not have been permitted to obtain a judgment against the Borrower after the non-judicial foreclosure sale of the property.

Stressing that assignment of the loan secured by the second deed of trust to the Second Lienholder after the trustee sale would not change this result, the Court reasoned that as the assignee of the sold-out second, the Second Lienholder stood in the shoes of the First Lienholder and was therefore "subject to any defenses which the [Borrower] ha[d] against the assignor . . . ." Accordingly, the Court concluded that because the First Lienholder could not have obtained a judgment against the Borrower, the Second Lienholder was also similarly precluded.

The Court also ruled that nothing in the anti-deficiency statute suggested that the presence of a third party bidder at a foreclosure sale took the sale out of the reach of the statute to allow a deficiency judgment.

Accordingly, the Appellate Court ruled that the trial court properly sustained the demurrer without leave to amend.

Turning to the award of attorney fees, the Court noted that the Second Lienholder filed its motion to voluntary dismiss after the trial court had already sustained the demurrer. In so doing, the Court observed that where an action has progressed to a "determinative adjudication" or to a decision "tantamount to an adjudication," a plaintiff no longer has the right to voluntarily dismiss under Cal Civ. Proc. § 581.

The Court rejected the Second Lienholder's assertion that, because it sought to voluntarily dismiss with prejudice, the trial court lacked jurisdiction to award attorney fees. The Court noted that allowing dismissal after a dispositive ruling had been made would permit the Second Lienholder to manipulate the judicial process. The Court thus ruled that the Second Lienholder had no right to voluntarily dismiss in order to avoid liability for the attorney fees once the demurrer had been sustained.

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